Posts Tagged ‘Low Interest Rates’

Gold’s bull market started in the year 2001, and after 4 years of correction from 2011 to 2015, the secular bull market is still intact. As the world is experiencing the burden of debt & sub mortgage crisis, which has the made the market illiquid & the bearish sentiment for gold is on extreme low. Gold on rise can be termed as the biggest surprise of 2016. Need Proof? Here are 50 of them.

July has not been kind to either market, with gold falling 4% lower from the month’s high, while its silver lost 9%. Easing is back on the table in the UK, while the ECB and Japan are also likely to be more dovish. From a technical point of view, both markets seemed to be primed for a sharp rebound, with silver in a descending triangle and gold in a symmetrical triangle.

The current P/E expansion cycle is now one of the largest in history. Although equity valuations are typically highest during periods of low interest rates, the current 18x P/E stands at the upper end of the historical valuation range. During the last 40 years the only instance in which S&P 500 forward P/E exceeded 20x was the Tech Bubble (peak of 24x in December 1999).

National debt has increased exponentially for the past 50 years. The 35-year graph shows on average the national debt has increased rapidly, even when priced in gold. Debt is increasing far too rapidly & gold is underpriced. The current national debt is equal to about 100 times the total value, at current gold prices, of the gold “officially” stored in Fort Knox. This should be cause for alarm.

Don’t for a second believe these are the only factors making a strong case for higher gold prices ahead. There are many more that suggest the same. Looking at all that’s happening around the world, $5,000 gold prices seems like a real possibility. I don’t expect the gold price to hit $5,000 right away. It will take time – Nevertheless, gold bears beware!

Silver never moves lock step with gold. When uncertainty prompts investors to seek out safe havens, they look to gold long before silver, as gold is a more straightforward safe haven. When gold is consolidating its first big move & preparing to take out its next resistance, that is when the safe haven status in silver catches up. Silver’s recent move only confirms the new higher price range for gold.

I expect that the U.S. and other major economies will perform poorly for several years to come, with recession or near-recession business conditions forcing the Fed and other leading central banks to pursue reflationary monetary policies and low interest rates – a bullish long-term mix for gold that promises stagflation and much higher prices for gold later in the decade.

The Fed must succeed in continuing to postpone rate hikes into the future without breaking peoples’ expectation that rates will rise at some point. It has to send out the message that rates will be increased at, say, the forthcoming FOMC meeting. But, as the meeting approaches, the Fed would have to repeat its trickery, pushing the possible date for a rate hike still further out.

The US Federal Reserve orchestrated an artificial boom from 2001 to 2007 through artificially low interest rates, paid for it with millions of destroyed jobs, wasted labor & wasted resources, but has resumed doing so once again. The Chinese Central Bank learned nothing from the Fed’s catastrophic experiment for its economy. They will reap the same rewards.

Owning physical gold is the best way to defend your wealth from destructive monetary policies. But if you’re looking for huge gains in gold, look at gold mining stocks. Gold miners are leveraged to gold prices. In a gold bull market, these stocks usually rise many times higher than gold itself. GDX, an ETF which owns gold mining stocks, has jumped 21% since early August while gold is up 6.2%.

A normalization of interest rates, after years of excessively low interest rates, is not possible without a likely crash in production and employment. If the Fed goes ahead with its plan to raise interest rates, times will get tough in the world’s economic and financial system. Why then do the decision makers at the Fed want to increase rates?

Describing Crisis – needs to relate all of these elements together – policy failure, debt, imbalances, energy. Each element is causatively connected to the others but sometimes in a time lagged way which obscures the relationships. Together these elements are bringing about what some observers are calling “secular stagnation”.

Investors looking for income have turned to junk bonds. Junk bonds didn’t grow much from 2002 to 2008. But when the Fed cut rates to zero in 2008, junk bond issuance began to take off & the number of junk bond issues soared 483% between 2008 and 2014. Today, some of the savviest investors are starting to place bets against junk bonds. Exit junk bonds today.

Gold’s position is assured because of the total reliance of our debt-based monetary system on unsustainable inflation. The yearly, “In Gold We Trust” report states that “we have all become guinea pigs of an unprecedented attempt at re-inflation.” QE and negative interest rates “are a direct consequence of a systemic addiction to inflation.”

Cheaper oil prices don’t just come ‘out of the blue.’ Other commodities used for raw materials, construction & economic growth, have been languishing too. Real median incomes remain stagnant since the Great Recession. These are all signs that the recovery we are seeing is mainly asset inflation brought on by cheap debt, not economic growth.

NIRP is now officially in the US, which means that one after another US commercial banks will join what has already become a NIRP free-for-all across most of continental Europe where NIRP now reigns supreme & where trillions in government bonds yield negative rates. JPM is preparing to charge large institutional customers for deposits.

Weak economies around the world offer weak demand for commodities and for capital. The effect is to keep interest rates extremely low and to push commodity prices down. We can therefore view the oil price as a symptom of poor global economic growth, which is a long-term problem & not just as a consequence of a slight oversupply.

Central bank activism, stimulating credit creation with artificially low interest rates, only works when people see little risk of default or rising rates. But that risk cannot be ignored forever. Rising rates come around sooner or later; often ferociously. When that happens, central banks lose their ability to coax stocks higher with lower rates.

Despite an improving job market and low interest rates, the share of first-time buyers fell to its lowest point in nearly three decades and is preventing a healthier housing market from reaching its full potential, according to an annual survey released today by the National Association of Realtors.

A lot of money on interest payments is saved by borrowing over shorter time frames. This strategy has indeed saved the US federal government hundreds of billions of dollars in interest payments, but it has also created a situation where the federal government must borrow about 8 trillion dollars a year – JUST to keep up with the game.